In this excerpt from the report ‘COVID-19 Tax Issues For Businesses’, Sarah Bradford gives some advice for employers and employees in this current situation.
During the Covid-19 pandemic, employees working patters may change. Some employees may be working from home, some may be furloughed and some may be working reduced hours. As a result, the benefit and expenses provided to employees may change and question may arise. It is important that employers understand the tax and National Insurance implications where benefits are provided to employees.
HMRC have published guidance on how to treat expenses and benefits provided to employees during Coronavirus. The guidance is available on the Gov.uk website.
Company Car Availability during the coronavirus
Where an employee has a company car, they may not have used their car for a number of weeks as a result of the lockdown or because they were shielding. Where the employee is furloughed, prior to 30 June 2020, employees on furlough were not permitted to do any work for their employee while furloughed. As a result, there may have been no business use of the car, and the employer may have prohibited private use.
It is therefore likely that questions will arise as to whether a deduction is permissible for periods of unavailability of a company car where working out the benefit in kind charge.
A tax charge arises on the provision of a company car when it is available for the employee’s private use. The trigger is that the car is available for private use, not whether the employee actually uses a car for private journeys. Thus, the charge will still apply if the car remains available for the employee’s private use, even if the employee makes no private use of the car.
The legislation deems a car to be available for private use, unless that use is specifically prohibited and there is in fact no actual use.
Where the car is not available throughout the tax year, a deduction may be given in calculating the car benefit charge. However, only certain periods of unavailability trigger a deduction:
- where the car is made available during the tax year, the period from the start of the tax year to the date on which the car was first made available to the employee;
- where the car ceases to be available to the employee throughout the whole tax year, from the date that the car ceases to be available to the end of the tax year; and
- periods of 30 days or more throughout which the car was not available to the employee.
Periods of less than 30 days when the car is off the road, for example, in a garage for a service, are ignored.
In light of the Covid-19 pandemic, HMRC published guidance on when they consider a company car to be unavailable for private use.
In the guidance, HMRC state that where an employee has been furloughed or is working from home because of Coronavirus and the employee has been provided with a company car that they still have, the car should be:
‘treated as being ‘’available’’ for private use during this period even if the employee is:
- instructed to not use the car
- asked to take and keep a photographic image of the mileage both before and after a period of furlough
- unable to physically return the car or the car cannot be collected from the employee’
Where restrictions on the freedom of movement prevent a car from being handed back or collected, HMRC accept that the car is unavailable where the contract has terminated from the date that the keys, including the fobs, are returned to the employer or to a relevant third party. Where the contract has not terminated, HMRC only regard the car as being unavailable from the date 30 days after the keys are returned.
HMRC also recognise that following the relaxation of the Coronavirus restrictions, it may take some time to collect cars where contracts have been terminated. HMRC accept that the car remains unavailable to the employee as long as the keys have been returned.
The unavailability tests set by HMRC are stricter than those posed by the legislation, which require only that private use is prohibited and does not actually take place; there is no requirement in the legislation that they keys are returned. Where an employee is instructed not to use the car and evidence can be provided that it was not indeed used, there are good grounds for a deduction where the period of unavailability exceeds 30 days, even if the keys are not returned.
Salary Sacrifice Arrangements due to coronavirus
HMRC have confirmed that changes in circumstances due to Coronavirus are accepted as a lifestyle change which allows salary sacrifice arrangements to be reviewed or varied. Where an arrangement is amended because of Coronavirus, the changes must be reflected in the employee’s terms and conditions.
Since 6 April 2017, alternative valuation rules apply to most benefits where provision is made under an Optional Remuneration Arrangement, such as a salary sacrifice arrangement. Transitional rules apply which mean that where the benefit in question is living accommodation, the payment of school fees or the provision of a car with CO2 emissions of more than 75g/km and the arrangement was entered into before 6 April 2017, the alternative valuation rules will not apply until 6 April 2021, unless the arrangement is renewed or varied prior to that date.
HMRC have confirmed that a change in the arrangement due to Coronavirus will not be regarded as a variation for these purposes.
Hardship Loans during coronavirus
To help employees adversely affected by the Coronavirus, an employer may provide an employee with a hardship loan to tide them over.
It should be noted that there are no special rules in relation to loans to help employees during the pandemic – the normal rules for cheap and interest-free employment related loans apply.
Under the beneficial loan rules, no tax charge arises if the outstanding loan balance does not exceed £10,000 at any point in the tax year. This limit applies to the total of all loans made to the employee, not to each separate loan. As long as this limit is not exceeded, there is no tax to pay and nothing to report to HMRC.
If the outstanding loan balance is £10,000 or more at any point in the year, the loan is a taxable cheap loan and the employee is taxed on the benefit of the loan. The amount charged to tax is the difference between the interest payable on the loan at the official rate and the interest, if any, payable by the employee. The official rate of interest is set at 2.25% from 6 April 2020.
Where a loan is taxable, the taxable amount can be worked out on the average loan balance or by reference to the amount outstanding each day if this produces a better result.
The loan must be reported to HMRC on the employee’s P11D, and the taxable amount included in the employer’s Class 1A National Insurance computation.
Share and Share Option Plans during coronavirus
Where employers operate share or share option plans, there may be Coronavirus implications to consider. The June 2020 issue of HMRC’s Employment Related Securities Bulletin set out the impact of Coronavirus on Share Incentive Plans (SIPs), Save As You Earn (SAYE) share option plans, Company Share Option Plans (CSOPs) and Enterprise Management Incentives (EMIs).
HMRC have also confirmed that while employers and agents should endeavour to register new schemes and file returns on time, where deadlines are missed as a result of the pandemic, HMRC will accept that Coronavirus is a reasonable excuse.
Share Incentive Plans during coronavirus
Under a share incentive plan (SIP) employees can receive different types of shares – free shares, partnership shares, matching shares and dividend shares.
Partnership shares are additional shares that an employee can buy out of their pre-tax salary. The amount of partnership shares that an employee can buy each tax year is capped at £1,800 or, if lower, 10% of the employee’s salary for the year.
To encourage employees to buy partnership shares, they may receive additional shares free (matching shares) in proportion to the partnership shares that they buy.
Where an employee has been furloughed and is receiving a grant under the Coronavirus Job Retention Scheme, HMRC have confirmed that the grant payment can constitute a salary and that SIP contributions can continue to be deducted from a furlough grant.
Participants in a SIP can choose to stop their deductions; this is unchanged during the Covid-19 pandemic. However, where participants stop deductions due to Coronavirus, HMRC have confirmed that they will not be allowed to make up missed deductions.
Save As You Earn Share Option Schemes
Under a Save As You Earn (SAYE) Share Option Scheme, employees save money into a savings contract, which lasts for three or five years, and are granted options to buy shares with the money saved when the contract matures.
The savings contract lasts three or five years. Money is deducted from the employee’s salary and paid into the savings contract.
The current prospectus allows employees to delay the payment of monthly contributions on up to 12 occasion in total without the savings contract being cancelled. HMRC have confirmed that where participants are unable to contribute because they are furloughed or are on unpaid leave during the Covid-19 pandemic, the payment holiday terms will be extended.
As a result, employees with a savings contract in place on 10 June can miss more than 12 months in total as long as the extra months are missed as a result of Coronavirus.
Where the months are missed, the maturity date of the contact is put back by the total number of months missed. So if an employee had already missed 10 payments and missed a further six due to Coronavirus, the maturity date would be delayed by 16 months.
HMRC have also confirmed that furlough grants made under the Coronavirus Job Retention Scheme can constitute a salary and contributions to a SAYE share option scheme can be deducted from furlough payments.
Options granted under a SAYE scheme can be granted at a discount if up to 20%. Where the share price has fallen as a result of the pandemic, granting options at a discount will potentially allow the employee to make a tax-free gain on exercise if the share price recovers in the interim.
Company Share Option Plans
A Company Share Option Plan (CSOP) is a discretionary share option plan that can be used to reward some employees and not others and is often used as an executive share option plan. Employees can be granted options over shares, capped at £30,000 at the date of grant. The options cannot be granted at a discount.
HMRC have confirmed that where employees and directors have been furloughed because of Coronavirus and were granted options prior to being furloughed, those options will remain qualifying options on the basis that the recipients were full-time directors and qualifying employees at the date of grant.
Where the share price has fallen due to Coronavirus, it may be beneficial to grant options as there is the potential to realise a tax-free gain if the share price recovers before exercise. However, if the deadline for exercise is approaching, the options may be worthless if the exercise price is more than the current market value.
Enterprise Management Incentives
Enterprise Management Incentives (EMIs) were introduced help attract high calibre individuals to small higher-risk companies. The EMI scheme is a tax-advantaged share option scheme.
Where EMI options are ready to be granted, it is possible to contact HMRC to agree a valuation. Where a valuation is agreed by HMRC, options normally need to be granted within 90 days.
As a result of the Covid-19 pandemic, delays may arise in granting EMI options, which means that more than 90 days have elapsed since the valuation was agreed. HMRC have confirmed that provided that there has been no changed which affects the appropriate valuation:
- any EMI valuation agreement letters that had already been issued and in respect of which the 90-day period expires on or after 20 March 2020 can automatically be treated as being extended by a period of 30 days;
- any new valuation agreement letter issued on or after 1 March 2020 is valid for 120 days.
However, if the valuation is likely to be adversely affected by Coronavirus, it would be beneficial to agree a new valuation giving rise to a lower option price.
Termination of Employment
The Coronavirus Job Retention Scheme comes to an end on 31 October 2020. At that point, employers will have to decide whether they can bring furloughed employees back to work on their normal hours, whether it is possible to agree reduced hours or whether, unfortunately, they need to make the employee redundant. Normal rules redundancy rules apply to furloughed employees. Employers who retain furloughed employees until at least 31 January 2020 may be eligible for a Job Retention Bonus.
Where an employment comes to an end, various payments may be made on the termination of employment. It is important that these are treated correctly for tax and National Insurance purposes.
Tax And NIC Treatment of Termination Payments
Payments made to an employee on the termination of employment may be taxed either as earnings or under the termination payments rules, benefitting from the £30,000 tax-free allowance. When making payments on the termination of an employment, it is important that the correct allocation is made to each camp.
The starting point is to determine the termination award. This is basically the sum of all payments and benefits that are received directly and indirectly in consideration or in consequence of the termination. The payment may comprise a number of different elements, such as unpaid wages or salary, bonuses, compensation for loss of office, redundancy pay, payments in lieu of notice, etc. Normal payments of earnings, such as accrued holiday pay, are taxed as earnings and are not included in the termination award.
Only the relevant termination award needs to be considered when determining how much is taxed as earnings.
The relevant termination award is taxable as earnings up to the level of the post-employment notice pay (PENP). Payments of earnings are taxable and liable to Class 1 employee’s and employer’s National Insurance contributions.
The ‘post-employment notice pay’ is essential the pay that the employee would have earned had they worked their notice period. This provides the benchmark against which termination payments are judged to see if they are earnings. The legislation provides a formula for working out the PENP; this can be quite complicated and professional advice should be sought.
The formula calculates the PENP by reference to the employee’s basic pay’ for the unworked period of notice.
Only those elements of the termination award which are included in the ‘relevant termination award’ are taken into account in determining what is assessable as earnings.
The relevant termination award is the termination award excluding:
- statutory redundancy pay or approved contractual pay up to the level of any statutory redundancy pay to which the employee would be entitled; and
- payments or benefits that are taxed under other provisions (for example, as earnings or under the benefits in kind rules).
The relevant termination award is taxable as earnings up to the level of the PENP. Payments taxed as earnings are liable to tax under PAYE and to employee’s and employer’s Class 1 National Insurance contributions. They should be reported to HMRC under RTI as usual.
If the relevant termination award exceeds the PENP, the excess is taxed under the separate provisions for payments made on the termination of an employment which are not otherwise taxable. Such payments benefit from the £30,000 tax-free threshold, where available.
If the employee has received statutory redundancy pay, this is taxed under the termination provisions and counts toward the £30,000 threshold. Where contractual redundancy pay is paid instead of statutory redundancy pay, the amount of that pay up to the level of the statutory redundancy pay is excluded from the calculation of the relevant termination award and benefits from the £30,000 threshold; any excess is, however, taken into account in working out the amount taxed as earnings.
If the excess over the PENP plus statutory redundancy pay or equivalent exceeds £30,000, the excess is taxable.
Since 6 April 2020, amounts in excess of the £30,000 threshold are also liable to Class 1A (employer-only) National Insurance.
Unlike Class 1A National Insurance on benefits in kind, the liability should be reported to HMRC via RTI and paid with the PAYE and NIC for the period in which the termination award is paid.
Statutory Redundancy Pay
An employee’s redundancy and other rights continue while an employee is on furlough. Consequently, if an employee is made redundant while on furlough they will be entitled to statutory redundancy pay if they have at least two years’ service. This includes the period for which they were on furlough.
The calculation of statutory redundancy pay depends on the age of the employee and the number of years’ service that they have.
To be eligible for statutory redundancy pay, an individual must:
- be an employee with a contract of employment;
- have at least two years’ continuous service;
- have been dismissed, laid off or put on short-time working.
Employees who take early retirement are not eligible for statutory redundancy pay.
An employee is entitled to:
- 1.5 weeks’ pay for each full year of employment after their 41st birthday;
- one weeks’ pay for each full year of employment after their 22nd birthday; and
- half a weeks’ pay for each full year of employment up to their 22nd birthday.
Service is counted backwards from the date of dismissal.
Statutory redundancy pay payable to an employee is capped at 20 years’ service. Weekly pay is capped at £538 per week (rate from 6 April 2020). This means that the maximum amount of statutory redundancy pay is £16,140 (20 x 1.5 x £538).
Where an employee is paid an annual salary, a week’s pay will simply be the annual salary divided by 52. If an employee’s pay varies, the average weekly pay over a 12-week period is used. Where an employee has been on furlough and has not received their full pay, redundancy pay should be calculated using their usual pay, rather than by reference to the furlough grant.
Statutory redundancy pay is not taxable as earnings. It is treated as a termination payment and counts towards the £30,000 tax-free threshold.
To download the whole Covid-19 Tax issues for Businesses Report visit this page here.